Getting a Commercial Real Estate Mortgage in The Current Econonmic Environment

November 15, 2008 - Updated: December 12, 2008

The world wide credit crisis is causing several problems throughout the global economy, particularly in industries that are highly dependant on borrowed money. Commercial real estate is just such an industry; virtually all commercial property is mortgaged to some extent.

Like residential lenders, commercial lenders have tightened up their underwriting standards and become more conservative in their lending decisions. In short; it's harder to get a commercial mortgage loan today.

One of the first criteria commercial mortgage lenders tweaked is the all-important loan-to-value ratio, or "LTV". LTV represents how much money will lend to a commercial real estate investor as compared to their assessment of the value of the collateral property.

The commercial mortgage industry never embraced 100% financing the way the residential side of the business did, but LTV ratios did climb during the recent run-up in property values and the corresponding economic boom. It was not uncommon for buyers of income producing property to succeed in securing financing with only a 10-15% cash investment. LTV ratios of 80% were the norm and lenders allowed fairly large seller carry-backs of 2nd position mortgages or other junior debt. A typical 80% LTV deal might have been structured with a first mortgage of 80% of the properties value, a mezzanine loan in junior position of 10% and a 10% cash injection from the borrower.

The days of high LTV ratios are miles behind us. Few institutional commercial mortgage lenders will consider lending any more than 75% of any property's value in this challenging market, and private lenders won't go over 65% . And further, their CLTV, or combined loan-to-value ratios have also plummeted. This simply means that first position lenders are restricting the allowable amount of second position debt. They simply won't allow large seller financing or junior debt structures any longer.

The bottom line is that investors, property owners, developers and project sponsors must come up with more of their own cash if they want to close deals today. Stabilized, income producing properties are able to garner up-to 75% LTV from conventional lenders if the sponsor has a good reputation. Private lenders will only go up to 65%. Non-stable buildings (insufficient cash-flow) have been sworn off by banks and Wall Street. Investors will have trouble finding conventional funding. Private lenders, on-the-other-hand will lend between 50% & 60% LTV on assets that don't cash-flow. Land is increasingly difficult to fund, traditional lenders are aggressively avoiding it. Private lenders, might lend about 50% of its value if you find one with an appetite for unimproved land.

If you want a commercial mortgage loan in this tight capital market, be prepared to come to the table with plenty of cash.

MasterPlan Capital LLC - Commercial Mortgage Loans - Privately Funded - Equity Financing - Asset Management - EZ Online Application - Quick Answers - Close in 7 Days - Glenn Fydenkevez is President of MasterPlan Capital, he has more than 20 years experience in the financial industry and has been a officer at one of the world's largest investment banks. He uses his financial resources, banking contacts and extensive industry knowledge to finance commercial real estate deals quickly and efficiently.